Eastern European “Country of the Rising Sun”

15.11.2010

Published on 14.11.2010

Ukraine is one of the fastest developing countries in the former Soviet Union and Eastern Europe in terms of renewable energy. The country can’t yet compete with the Czech Republic on solar generated energy capacities, however, the government support and the action of incentive tariffs (feed-in-tariff) open ample opportunities for producers of solar panels, for developers and for engineering companies.

Today Cleandex talks about the history, the current state and the prospects of the Ukrainian market of alternative energy and of solar energy in particular, with Dr Dmytro Lukomskyi, shareholder and CEO at Avenston, co-founder of Rentechno. Mr Lukomskyi specializes in the implementation of projects using energy-efficient technologies and renewable energy sources since 2001.

IAA Cleandex: Tell us what are the company’s areas of competence on the alternative energy market?

Dmytro Lukomskyi: Currently our group of companies focuses on projects in the field of renewable energy and energy efficiency technologies. Initially, we came to this area from solar energy, which remains for us the key and the most prospective direction nowadays. We started doing this business actively in 2009 (initially under the brand of SolarUA and later as Avenson). But if to talk about the practical experience, we may start the countdown since 2001, when there was launched the first Ukraine’s production of photovoltaic cells and solar panels, with participation of our specialists.

Besides photovoltaics, the company paidsome attention to wind power, energy-saving lighting, heating systems based on heat pumps and thermal solar collectors. We offered our customers comprehensive engineering solutions, that, as a rule, combine several different technologies flexibly, allowing to get the maximum benefit from the use of «alternative» solutions, and to remain within reasonable cost with a reasonable investment return.

IAA Cleandex: What are the major events in recent years, that have influenced the development of the Ukrainian market of alternative energy, you might note? Please explain the essence of the government measures supporting «green» power generation.

Dmytro Lukomskyi: Of course, the key event was the adoption of amendments to the law «On Electric Power Industry», that have introduced the concept of «green tariff» to our everyday life and stimulated the implementation of relevant projects, first of all, in sphere of wind power industry, power generation from biomass and small hydropower. As for solar energy, despite the most attractive level of incentive tariff, the market was in a state of waiting, till the autumn of 2010. Many of the market players were uncertain whether they actually will be able to get the declared tariffs and what will be the practical mechanisms for the declared compensation. But after the commissioning of the first two solar power plants in Crimea, and later, at the end of the year — one more in Vinnytsia region, the market has livened up considerably.

Late last year, it was decided to make another important change in Ukrainian law. The Norm that sets the part of materials and components produced in Ukraine in solar panels for use in construction of solar power plants, must be at least 30 percent, is not in effect yet, but its acceptance was postponed for one year. This change, being the matter of dispute, is the most significant impact on short-term trends in the solar energy market of our country. Many of the projects that envisage to launch its own production of solar panels and the subsequent construction of solar power plants, have been reduced in favor of power generating business only.

Also we can’t ignore the launch of USELF 50 million EUR investment program executed by EBRD to facilitate the implementation of renewable energy projects in Ukraine in the end of last year. Targeted projects include all forms of electricity generation from renewable energy sources, including hydro, wind, biomass, biogas and solar. Arrival of such a prominent player as EBRD became an event, that confirmed the appeal and promise of this industry once again.

IAA Cleandex: First, let’s talk about the industrial power generation. What kind of support measures does the government provide to developers of big power stations? Is there an interest of a private capital? How profitable is this type of activity today?

Dmytro Lukomskyi: The government support is expressed not only in setting green tariff, but also in VAT and import duty exemption on equipment for power plants using renewable energy. But this preference becomes effective only after a special resolution of the Cabinet of Ministers, in contradistinction to the tariff which is to be approved by the National Electricity Regulatory Commission of Ukraine.

As to the private capital, its interest is also felt well enough. The number of requests has increased significantly after delaying the requirement stimulating the use of domestic components for solar power plants. This has given more opportunities for investors in completing power plants and in improvement of financial efficiency of the projects.

If to talk about a profitability, this highly depends on the specificity of each project. For example, in construction of solar power plants with use of credit financing, a project owner can expect a return of investment within 3-4 years, with IRR of about 25-30%. As for wind power, the situation is some more attractive, due, primarily, to the smaller size of a capital investment of a specific project.

Late last year, the head of State Agency for Energy Efficiency and Energy Saving of Ukraine (NAER) Mykola Pashkevych has declared that the amount of an investment of projects on wind and solar energy will be 400 million EUR in 2011. Is this a real number, on your opinion? Please give your comment on the statement regarding the construction of 2 GW of capacities in Crimea.

Dmytro Lukomskyi: Let’s estimate these numbers. Today the construction of a solar power plant costs about 3 million EUR per 1 MW of installed capacity. And now in Ukraine there are similar projects on more than 300 MW declared already. Of course, not all of these facilities will be commissioned in 2011, but even the projects known for us require investments of about 150-250 million. On the other hand, the total capacity of wind power stations put into operation is much higher than of solar plants. Therefore, the sounded number seems quite real. At least, no mistakes with the rank.

As for the projects in Crimea, our position about it is more restrained. First, the announced scopes are too large, even for more developed countries as compared with Ukraine or CIS states. Second, we’ve carried out our own analysis, and we believe that the implementation of even a third of the projects announced in Crimea is impossible without substantial modernization of the power grids. But that has much higher cost and different in scale. Such projects can be implemented only with the full support of the government (real, not declarative) and in a long enough period of time. Moreover, the peninsula’s needs in electric power have their limits, and the question of transfer of excess capacity to the continent remains open. Exactly for the above mentioned reasons, we orient our solar energy projects to Southern regions of the country, but not to Crimea itself.

IAA Cleandex: Are there any more projects of construction of solar and wind power stations known to you in Ukraine?

Dmytro Lukomskyi: Of course, we know about a lot of such initiatives. Almost all of big projects are wellknown and illuminated in media. As for smaller projects, the situation is different: their owners are often reluctant to publicize their plans in advance. Therefore, I won’t indicate specific projects. I just can say that our company already participates in construction of rooftop PV power station with total installed capacity of several MW. In addition, there are planned constructions of several small hybrid wind-solar power stations in different regions of the country.

IAA Cleandex: The internal market that suddenly appeared, of several hundred million dollars, caused the deficit of its professional players. At what expense does it succeed to compensate the lack of experience in implementation of large projects? How actively do foreign engineering companies work in the country?

Dmytro Lukomskyi: This is a very important and topical issue. In fact, until recently there were built not a single solar power plant in the country, and local players have no relevant experience practically. So everyone is trying to solve the problem in its own way.

If to talk about small projects, they try to implement them by domestic companies. In most cases, it brings a negative experience. Large projects start with the support of a large foreign engineering company, as usual. At first glance, this is the most correct way. But in practice, the life makes its own corrections. Obviously, most of the companies with experience in solar energy have never worked in the CIS market. They can be very good specialists in their field, but when they are facing local particularities, not always they can effectively manage complex projects in unfamiliar territory.

Recently we provided consulting to a major project, which was planned to be financed by credit from a major European bank. The Bank has nominate the condition under which a known western EPC-contractor had to assume the full responsibility for the project. And then, the project have been stalled due to the fact that all the big companies that have been contacted for such a request, eventually refused to take on such a responsibility. In this case, they rightly felt that their experience in dealing with technical issues does not guarantee the ability to bring specific project to a successful conclusion.

Being aware of the situation that arose de facto, our company has chosen a third way. When working with clients, we take full responsibility for a turnkey project. In such cases, the lack of experience in implementation of major projects is compensated by involving more experienced foreign partners. Thus, on solar energy, we cooperate long and successfully with a large company, which has designed and built solar power plants with total capacity of over 120 MW in the USA since 2003. Our experience shows that in Ukraine the approach, when a local company hires subcontractors among highly qualified foreign partners, is more effective, than vice versa — when a western EPC-contractor is trying to implement the project with the help of local contractors.

IAA Cleandex: Could you note two or three leaders of the Ukrainian alternative energy market in each of the segments (for wind and solar energy): development, consulting and design, equipment production.

Dmytro Lukomskyi: The market is developing very dynamically and I would not like to offend anyone. Concerning solar energy market, I would note ActivSolar, Beten, Kvazar, Pillar and our group, and as for wind, the worth mentioning are the following: again Beten, Ventureal, DTEK, Eurocape and Karbon.

IAA Cleandex: Except the well-known in Europe «Kvazar», are there any major manufacturers of solar photovoltaic equipment in Ukraine? Who supplies the equipment for newly constructed stations?

Dmytro Lukomskyi: Today Kvazar is still remaining the only manufacturer of solar panels. Last year in Ukraine there were announced several contracts on construction of plants for the production of thin-film solar panels with an annual capacity of 6 and 18 MW. Basing on information available to us, the first solar panels will be manufactured not earlier than the second half of 2011. But we know nothing more about a progress in this direction.

Our company was also planning to launch its own production of silicon solar cells. We have accumulated the greatest practical experience in this sphere, by participating in several similar projects around the world since 2001. Last year we had a number of quite successful negotiations, but due to the fact that government incentives for the use of domestic components were postponed for a year, our plans also have been temporarily frozen. Today we continue working in this direction, but I can’t announce any certain time.

IAA Cleandex: Let us turn to the segment of small and medium-sized installations. In developed countries the business invests more actively into rooftop PV installations than the populace do. How this goes on in Ukraine? Were there any cases when a production or trade company constructed its marketing policy around «green» electricity?

Dmytro Lukomskyi: The specificity of green tariff in Ukraine is that it is equally difficult or, if you want, is equally easy to get it both for a large project with 10 MW, and for a small project of 10 kW. Anyone will have to pass the same way, and this automatically means that the connection to green tariff for small projects becomes economically unfeasible. On the other hand, for the last half a year we’ve received several requests for connecting to green tariff from companies who are ready to invest into a small pilot project for 30-50 kW and only then to make a decision on further expansion. In addition, we are currently working with the owners of commercial real estate, encouraging them to use «green» electricity.

IAA Cleandex: How profitable is installation of microstations on RES for private consumers in Ukraine? How much does it cost on average and how many years may the payback period continue (you can do a mini-calculation: cost of the basic components, installation, savings per year)?

Dmytro Lukomskyi: The cost of a wind power plant is determined by its capacity, type (grid-connected, stand-alone, combined) and can vary from 2.5 EUR per Watt and higher. The payback period of a grid-connected wind power plants with a green tariff is about 5-7 years. In case of stand-alone or a combined wind facilities it all depends on availability of alternative solutions, and most likely, you need to talk about a relative payback period.

As an example, I’d mention one of our projects, in which the centralized electric power grid was absent, and the power supply was provided by gasoline generators. Considering the cost of construction of a power line and transformer substation, use of the hybrid solution combining wind-solar system and the existing generators has become more justified in financing. But the similar solution would never have passed the economic selection at a site connected to the centralized power grid.

IAA Cleandex: How do you foresee the development of alternative energy market in Ukraine in the coming years? The scope of government support and private investment, the level of competition, the profitability and other components.

Dmytro Lukomskyi: We believe that the alternative energy market in Ukraine will grow rapidly in the next years. Of course, if any significant changes of the legal field that we don’t know, will not take effect. In coming years we see all prerequisites for the rapid growth of investment and development of related directions of business. What will happen when the government support will begin to decline? To my mind, it will happen the same as we saw at the example of other countries: the strongest players will refocus on new markets and the weaker ones will leave the market. Obviously, the level of competition will increase only, and the profitability will decline slowly in the coming years. Therefore, now is the best time to enter this market.

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Avenston Group is one of the leading players on Ukrainian market with focuse on implementation of integrated engineering solutions with use of energy-efficient technologies and renewable energy sources. The company is headquartered in Kyiv. Avenston team has the years of experience behind in designing and installing various systems of any complexity, participation in major projects of launching industrial production in various industries. The main activities are engineering, B2C and B2B commerce, and industrial consulting. The company provides energy audit, design, supply, installation and servicing maintenance of various engineering solutions, and also offers consulting on a wide range of issues related to solar energy. Among the projects implemented by our group, we can distinguish the autonomous and backup power supply.